Cloud Accounting & Finance

What Would A Blockchain Expense Policy Look Like?

For all of the revolutionary potential that cryptoassets like bitcoin hold for the future of finance, their impact on the economy may be exceeded, in the long term, by the technological framework on which they sit.

The blockchain, which is a distributed ledger that uses a network of computers to collectively agree on the ledger’s audit trail, is a monumental development in our ability to track assets in a decentralized way. It’s the first system of transactional record-keeping to successfully transfer the trust usually placed in a central authority, such as a clearinghouse or a bank, to an automated and decentralized network. It allows counterparties in a transaction to exchange directly with one another, safely and transparently. (Here’s a nice intro to the concept.)

Blockchain is going to be a big deal for any industry that seeks to eliminate the role of an intermediary when recording a transaction, transforming everything from the power grid to voting. But what about expense reporting?

Corporate expense management is one of the rare areas in which systemic friction is intentionally maximized; where you not only want to put a blockage in the flow of money, but a specifically human one. Even highly automated expense reporting solutions like Abacus are designed to give more control to central administrators, not less. Could there be an application for blockchain in the T&E workflow?

Here are a few ideas about how that might work.

1. You’d need a private blockchain

Blockchain was originally developed as a global, shared ledger that allowed multiple bitcoin users to verify and reconcile transactions simultaneously. It was an ingenious solution to the problem of trust—how do I know that if I pay you first, you’ll hold up your end of the transaction?—that eliminated the need for central intermediaries like banks and regulators.

As the distributed ledger system began to find use cases outside of bitcoin, developers began thinking of ways to leverage the benefits of blockchain—which include automated processing and a trusted, complete audit trail—without allowing everyone in the world to see it.

The result was the emergence of privately-held blockchains. Today, distributed ledger systems are generally created with one of three categories of transparency:

  • Public (permissionless) blockchains. Anyone in the world can initiate, see, and process transactions on the blockchain.
  • Private (permissioned) blockchains. Everything about the blockchain is restricted, from who can view the ledger to who can process its transactions.
  • Consortium blockchains. A hybrid of the two. For example, maybe the ledger and audit trail is publicly viewable, but control of the blockchain lives with a small group of administrators.

Public blockchains are going to revolutionize the way we track the movement of assets in public, like corporate securities and real estate titles. But T&E? No company wants their employee expenses shown to the rest of the industry. If you were to set up a blockchain expense policy system, you would build it on a permissioned blockchain that was privately held and internally visible.

2. Your method of review & approval will depend on the visibility of your ledger

Even after you had set up your private blockchain, you would still need to decide how public it should be within the confines of your institution. The three levels of visibility we just talked about also apply here, and each would be capable of a different method of review and approval. Here are three potential approaches to expense review:

Public blockchain: Radical expense transparency

Believe it or not, there are some companies out there who prefer to have almost no control over employee expenses. These radical (and generally small) teams choose to make every expense visible to the whole company, theorizing that peer review regulates expenses better than a controller would. For the few companies interested in this degree of transparency, an expense blockchain confirmed by every employee in the organization would work well.

Private blockchain: A cryptographic twist on a normal expense database

Finance teams who want more orthodox control over expense review and approval could create a blockchain that only a few central admins could see or verify. In that case, it wouldn’t look much different than a normal database of employee expenses — albeit one “with a degree of cryptographic auditability attached,” as blockchain pioneer Vitalik Buterin put it. Then again, an expense platform like Abacus already offers complete audit trails, so blockchain delivers relatively little.

Consortium blockchain: Multiple approvers add to the public ledger

A hybrid public/private expense blockchain could be made visible to the whole company but only editable by designated managers. That way, every expense would have to be verified collectively by that group of approvers in order to be “approved” to be added to the blockchain. You could even program rules specifying which managers are designated to approve which kinds of expenses, based on which department the employee is in, what kind of expense they’ve submitted, and so on.

Again, though, this consortium approach is really just a primitive version of Abacus’ multi-tiered manager approvals, which routes every expense to a specific chain of approvers based on automated rules.

3. Transacting business expenses in cryptocurrency could make it worthwhile

The clearest overlap between blockchain and expense management is the function of transmitting currency. (Abacus, for example, remits reimbursements via direct deposit to employees’ banks.) If your company started doing business in cryptocurrencies in some hypothetical future, an expense blockchain might offer benefits:

A native accounting format

If your business were spending and collecting money in a cryptocurrency like bitcoin or ether, each of which has its own public blockchain, then maintaining a private blockchain just for tracking spend would keep your expense transactions in their native format. By the same logic, though, if your whole business took place in cryptocurrencies, you might just move your entire accounting database over to blockchain. Adding transactions from a public blockchain to a private blockchain would be automatic, instantaneous, and basically pre-reconciled.

A reserve supply of petty cash

If the idea of your business only dealing in cryptocurrency is too futuristic a thought, consider the possibility of maintaining a cryptocurrency reserve from which employees could draw in the event of an emergency.

Suppose a traveling employee needed to make an unforeseen payment immediately and didn’t have a corporate card. Instead of paying for the charge themselves and waiting for the ACH transfer to hit their bank account, they could pull from the company’s crypto reserve and instantly have money that could then be converted into “fiat” currency like U.S. dollars. That withdrawal would be recorded on your company’s internal expense blockchain.

A fiat expense policy executed via tokens and smart contracts

Even if your company doesn’t transact in cryptocurrency, you could still create, enforce, and audit a fully automated expense policy on a private blockchain by creating tokens on that blockchain and pegging them to real-world fiat dollars. Smart contracts, which are automated “If This Then That” instructions programmed into the currency, could approve expenses, remit reimbursements to employees, and prevent exceptions automatically—all of which Abacus can already do with U.S. dollars.

Conclusion: The right tool for the job?

To return to the central question: What would an expense policy on the blockchain look like? The answer, it seems, is that barring a radical transformation of the typical corporate expense policy, blockchain isn’t a concept particularly suited to the needs of expense reporting.

Advocates of blockchain are the first to warn against overzealously applying it—or attempting to apply it—to use cases for which it is not suited. Expense management seems to be a prime example.

Blockchain’s most valuable application is to remove the need for a central authority in peer-to-peer transactions. There are plenty of ways in which that streamlining will transform the way business is done. But given that corporate expense management is inherently centralized and authoritarian, a distributed ledger system is more cumbersome to expense management than other, equally automated and auditable platforms.

Blockchain is good at tracking valuable assets in public, but employee expenses don’t happen in public. They are part of the closely-guarded relationship between an institution, its operations, and its employees. Your finance team is the steward of that relationship, and until radical transparency defines the money in which the whole economy transacts, it’s reasonable to desire more control rather than less.


Related Posts